Ethereum has shipped the merger and its offering is deflating. Why is ETH down?

It seems that “the merger” is not the bullish catalyst that ETH holders were hoping for, at least for now. ETH had a rough ride after the milestone, briefly reaching $1,642 before erasing its gains. According to CoinGecko, it is currently trading around $1,593, down 0.5% in the past 24 hours.

Ethereum successfully “merged” from Proof-of-Work to Proof-of-Stake at about 08:43 today, marking a new era for the world’s second largest blockchain. The merge is one of the most significant technology updates in the history of crypto-currency and has been expected for several years. With this update, Ethereum now relies on validators rather than miners to reach consensus, which brings several benefits to the network. These benefits include a 99.95% reduction in power consumption and a 90% reduction in ETH issuance (Ethereum no longer needs to pay miners to add new blocks to the chain, but rewards ETH acquirers for validating the network).

With Ethereum reducing its issuance after the merger, ETH supply was expected to peak before the event. That’s partly because Ethereum implemented another update called EIP-1559 last year, which introduced a burn on ETH transaction fees. According to ETH’s outstanding supply peaked at 120,521,139.31 ETH at the time of the merger. Since then, it has decreased by about 170 ETH, which means that the ETH is currently deflationary.

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Due to the combination of reduced ETH issuance, EIP-1559, and continued demand to use the Ethereum network, ETH enthusiasts have long hoped that the merger could have a positive impact on the asset’s price. ETH looked strong in the weeks leading up to the merger, soaring more than 100% above $2,000 from the June low through mid-August.

ETH shaken by macroeconomic situation

However, ETH has struggled amidst rampant inflation around the world, rising interest rates and weak momentum in the broader crypto market. The number two crypto hinted that it could disappoint ETH holders in the days leading up to the merger, trending lower against BTC and then stalling just before the event.

The latest price action suggests that the Merger did not have an immediate impact on the market. It should be noted, however, that investors often take time to react to such events, although many claim that the market is ” forward-looking. “BitMEX co-founder Arthur Hayes was one of many pundits to acknowledge this last week, when he said on the Bankless podcast website that the merger could be a “sell the news” event with a possible 20% correction after the fact. However, Hayes said in that same interview that he viewed the merger transaction as “a no-brainer“because of the supply shortage factor.

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If the ETH remains deflationary, there is a good chance that the asset will take off in the future. This could take some time, however, especially since the Federal Reserve has indicated that it is prepared to continue raising interest rates to curb runaway inflation. As this year has proven, interest rate hikes tend to hit risky assets hard, especially crypto-currencies like BTC and ETH. Even if a major event like the merger goes off without a hitch, ETH has an uphill battle as long as it has to “fighting the Fed“.

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